Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 119: Long Run Real Exchange Rates - A Cointegration Analysis

Annika Alexius
Additional contact information
Annika Alexius: Department of Economics, Postal: Stockholm School of Economics, Box 6501, S-113 83 Stockholm, Sweden

Abstract: Long run purchasing power is tested on 16 OECD countries using data from 1960 to 1994, PPP is rejected for some countries (Canada, Japan, Switzerland, Austria, Italy and Spain) and not rejected for other (Sweden, France, Holland and the United Kingdom). For the latter countries, impulse response functions show that half of a disturbance tot the equilibrium real exchange rate disapperars within three years. The method used is Johansen's maximum likelihood approach to cointegration. Simulations are used to obtain empirical critical values of the tests.

Keywords: Purchasing power parity; real exchange rates

JEL-codes: F31

37 pages, June 1996

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